2017 (8) TMI 1483 - AT - Income Tax

TPA - comparable selection - Held that - Proposition laid down by the Tribunal in M/s. Vishay Components India Pvt. Ltd. Vs. DCIT (2016 (5) TMI 1321 - ITAT PUNE) we hold that where the financial data of M/s. Microgenetic Systems Ltd. was available during TP proceedings, then the same may be considered in case the said concern fulfills all the filters applied by the TPO.

Summary

Issues Involved:

1. Treatment of pre-operative expenses as non-operating expenses.
2. Inclusion of M/s. Microgenetic Systems Ltd. as a fresh comparable in Transfer Pricing (TP) analysis.

Issue 1: Treatment of Pre-operative Expenses as Non-operating Expenses

The Revenue challenged the CIT(A)'s decision to allow pre-operative expenses as non-operating expenses, arguing that the appellant had shown these expenses as operating expenses in its financial statements. The CIT(A) had observed that pre-operative expenses incurred before the commencement of profit-generating business operations did not contribute to the generation of business profit and thus should not be considered for computing operating profit. The CIT(A) made a reference to the Safe Harbour Rules and relevant case laws to support this decision.

The Tribunal upheld the CIT(A)'s decision, citing a similar issue addressed in the case of ACIT Vs. M/s. Amberpoint Technology India Pvt. Ltd., where it was held that pre-operative expenses incurred for establishing the business and not for rendering services should be excluded from operating costs. The Tribunal reiterated that pre-operative expenses are not part of the operating expenses for the period in question and should be excluded while computing the operating profit.

Issue 2: Inclusion of M/s. Microgenetic Systems Ltd. as Fresh Comparable in TP Analysis

The Revenue contested the CIT(A)'s direction to include M/s. Microgenetic Systems Ltd. as a comparable in the TP analysis, arguing that the assessee is not permitted to make a fresh search during TP proceedings. The CIT(A) had directed the Assessing Officer to include M/s. Microgenetic Systems Ltd. if it met all the filters used by the TPO in the transfer pricing assessment.

The Tribunal found that the inclusion of new comparables during TP proceedings is permissible, referencing the case of M/s. Vishay Components India Pvt. Ltd. Vs. DCIT. The Tribunal noted that the TPO is empowered to use any data available during TP proceedings and that such data should be considered if it meets the functional comparability criteria and other filters applied by the TPO. The Tribunal upheld the CIT(A)'s direction to include M/s. Microgenetic Systems Ltd. if it satisfied all the filters, dismissing the Revenue's appeal on this ground.

Conclusion

The Tribunal dismissed both the appeal of the Revenue and the Cross Objections of the assessee. The Tribunal upheld the CIT(A)'s decisions on both issues, confirming that pre-operative expenses should be treated as non-operating expenses and that M/s. Microgenetic Systems Ltd. can be included as a comparable if it meets the necessary criteria.